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Wednesday, July 23, 2014

This interview was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 1, pp-3-4

https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q1%202014-15.pdf

Mr. K S
Gopalakrishnan, a fellow member of the actuarial bodies
of Canada, UK and India, an associate of the Society of Actuaries (USA) and
fellow of the Insurance Institute of India, has been in the Life Insurance
Industry for over 30 years. He has worn many a hats
during this journey; Appointed Actuary, CFO, Underwriter, product developer,
and now the CEO and MD of AEGON Religare Life Insurance Company and a
member of the Council and Vice President of Institute of Actuaries of India.

His passion for
the industry is evident in his gleaming eyes and the pride with which he talks
about his involvement with the Mortality studies of Indian insured lives
(1994-96) for LIC and the product innovations. In an interview with Dr. Nupur Pavan
Bang, Head- Analytics, Insurance Information Bureau of India, Gopalakrishnan
talks about the “noble business” of Life Insurance and its future, in India,
according to him.

You have been credited with the innovation of the unit
linked product (ULIPs). Does it bother you that many people lost money because
of this product?

An entire
business model revolving around unit linked insurance products was launched in
March 2001. It changed the industry completely. The product brought
transparency, liquidity and flexibility to customers. The sales process was
backed by interesting features through customized benefit illustrations and the
free look option.

Over the years,
many challenges emerged largely related to sales process and customer
understanding. The sales process sometimes involved positioning the product as
a short-term product (say, three years) indicating consistent superior market
returns. I am not sure if every customer fully understood the market risk
associated with stock markets and the interest rate movements. This also leads
to the question of whether unit linked products are for every customer segment
or not. There were challenges.

When a weaker
stock market started hitting, customers started comparing their policy fund
values with premiums paid and then came the complaints. The product was good,
is still good and will deliver customer value as long as customers realize it
is an insurance-cum-investment product that has to be held for the long-term.

You pioneered concepts such as online Life Insurance, unit
linked with investment guarantees and free looks in India. What has been your
experience with the regulation? Do you think excessive regulation impedes
growth and innovation?

I view these
things as a cycle. This is an evolving market from a regulatory architecture
viewpoint. The market opened up only in 2000. Everyone is learning along the
line, including the insurers, management, employees. Many are new to life
insurance. You talk about long-term business, and the longest experience that
people have in some of the companies [private sector] in this industry is just
about 10 years. I see this as a game where everyone learns and then changes.

When the opening
up happened in 2000, there was complete freedom in terms of product design,
pricing and largely even how distribution evolves. Towards the end of first
five years of opening up, challenges around customer perceptions started
emerging. To respond to those challenges, boundaries were created for product
innovations in savings/investment-cum-insurance category, probably for the
right reasons by the regulator.

There is still a
huge scope for product innovation in the protection space. You can develop products
for segments which are not yet offered insurance. Lot of data and research
backing is required.

Do you mean micro-insurance? Or do you have any other
segment in mind?

One is by gender
(women, working women), they could be targeted. Second are health conditions
which industry doesn’t rate. For example, conditions like certain types of diabetes.
For every risk there is a price. Price may be unacceptable, but then we should find
ways to hedge the risk and offer solutions to customers.

What about Mental health insurance? There is no such
policy in India which caters to this. Do you see it as a potential area?

I am not sure.
It may help if government plays an active role in this space so that more
people have access to the related health care.

India has the highest savings rate in the world at
around 30% of the GDP. According to 2012-13 data published by the Reserve Bank
of India, a large part of it, around 65%, goes into physical assets and about 35%
goes into financial assets (currency, fixed deposits, stocks, insurance,
pension, etc). Life Insurance accounts for about 20% of the financial savings.
In spite of this, the penetration is low in India.

When someone
buys motor insurance, nobody asks, “what will I get on maturity?” In life
insurance, almost everyone asks that question. As an industry, we need to
answer that. People of India are skewed towards saving and investment products.
This is the reason we still see life insurance positioned around savings and
investments.

Also, collectively,
the industry must reach out to people, campaign, and tell them the importance
of insuring against dying, living longer and against falling sick. In 2008, we ran
a campaign, “kum insurance lene ki bimari
(K.I.L.B.) (the disease of under insurance)”. But we did not have the right distribution
channel to translate this message into results. In 2009, we launched online
term insurance product because we realized that there is a customer segment
that wants to buy life insurance only for pure risk protection and would like
to do that directly with the life insurer. I am happy to see that a large part
of the industry players too have moved in this direction.

In my opinion,
Insurance penetration, Premium to GDP, is not the right measure for life
insurance. A right measure could be the amount of risk coverage in-force as a
percentage of GDP.

Is insurance density a better measure?

The amount of
risk cover in-force is perhaps a meaningful measure i.e. what is the total sum
assured or death cover of the population and what is the GDP for the country? If someone aged 35 is working today, they
should be covered for 15-20 times what their annual earnings is.

Would keeping aside a small percent of the revenue or
profit for awareness help? Securities Exchange Board of India has mandated an
Investor Protection and Education Fund. Would a similar initiative in Insurance
be helpful?

This would
surely help. Awareness of life insurance should be spread. Advantage that Life
Insurance has over Mutual Funds or equities is that life insurance is always
viewed as a mass market product category. Life insurance reaches even people at
the bottom of the pyramid. Life Insurance has more touch points than many other
financial products and running a campaign should be easier.

Is there anything specific that the industry can do to
capture the market? The section of society which actually needs insurance is
not getting it.

I believe Life
Insurance is the only business where, when the customer is no longer there, we go
and pay a financial benefit. It is a noble business. In the last few years,
things have become complicated. The brochures, the policy document, the
terminologies, are all very complex. Very few customers read the material that
is sent to them. The purchase process as well is complicated and has become
time consuming. So simplifying things is important.

At AEGON Religare,
as an organization, we want to try and do it [simplification] as an initiative
this year.

For the period 2000 to 2010 we saw a steep growth of
30% in the life Insurance sector. But from 2010 to 2012, the growth has come
down to 3%; lower than the GDP. How do you see the growth in the next ten
years?

I think it will
be modest for few years and then start picking up. Life insurance is a retail
business. There are certain products which cater to groups or businesses, such
as employer-employee term insurance, gratuity etc. But largely, it is a retail
business. People like to sit across a table, understand the product and then
buy. Agents play an important role. There are other channels, though agents
still have the dominant share.

Training the
agents is a big challenge, especially in an environment which is volatile.
Things keep changing, product design keeps changing, tax requirements change,
and agents need to be re-trained. People get disinterested and feel that there
is no stability. There is some nervousness in the front line. That is one
reason the growth has been muted.

Second reason is
that in the past the industry grew on back of lot of ULIPs selling, where expectations
were created about superior returns. Now, with change in product mix towards
guaranteed benefits products, industry sales growth will be moderate.

Stability for
the next 3 years in products regime and growth of GDP will bring back growth to
the life insurance market.

Is the industry well poised to manage risks? The
Banking sector in India is going through an era of high non-performing assets.
Do you see an Asset Liability mismatch (ALM) happening in the Life Insurance
industry in the future?

There are two
types of risks (apart from operational, litigation, strategic, etc.), one is insurance
risk (e.g. mortality, morbidity) and the other is investment related risk (e.g.
ALM).

I don’t see mortality/morbidity
as a big risk, because by and large life insurers are good at pricing this risk
and underwriting this risk. Also, there is reinsurance which is for the entire
term of the contract. It could also be a one-time event like a catastrophe. I
think industry is good at quantifying it [the associated risk] and transferring
it.

ALM risk
certainly exists as everyone is writing liabilities that are of long-term. For
example, products with policy term of 15 years and longer are quite prevalent.
The reality is also that there are not enough investment avenues that match the
liabilities by duration and cash flows. If after a few years, interest rates
start dropping and reach say 2% and there is a big block of existing business,
then you will see the problem starting. We are aware of the risk. We can run
models quantifying the risk and set aside a reserve for the risk. But, the risk
still exists.

It is an issue
for the industry as there are not enough hedging avenues. This is one of the
reasons why private players moved to Unit Linked products. In Unit Link we kept
the mortality risk but transferred investment risk back to the customer. But I
hope things will change as the regulator considers investment in derivatives
for longer duration. The financial markets too have to develop depth.

In the first article in the series of understanding how
the economic machinery works, we introduced transactions, credit, interest
rates and inflation. In the second article, we dealt with the importance of credit
and introduced deleveraging. In the third part we delved into the impact of
deleveraging and introduced fiscal deficit and quantitative easing.

This concluding part will weave all the different
parts of the economic machinery together to help the readers take a view on the
current economic scenario in India with a new perspective.

The case of India is very different from any other
country in the world. We once controlled 25% of world GDP but today we are far
from there. The major issues that we face today are:

·Lack in the sense of building consensus to take
any important and sometimes difficult decisions due to our democratic form of
government

·High inequality when it comes to wealth
distribution

·Lack of interest in becoming more productive,
generally. Socialist measures and freebies are good only in the short run as
they act as a tonic to the pain for people in lower income strata. But we
really need to become productive in the long run so that everyone gets what
they deserve. This calls for a shift in the morale and thinking in our country
as a whole.

Come to think of it, whatever the ideologies of our
leader are, the end result should be nothing more than well being of our fellow
citizens. Health, wealth and wisdom must be easy to pursue in our country.

In fact we believe that economic progress is the
answer to our disputes with China, Pakistan and also important to taken
seriously by other nations. Internal problems like naxalism can also be fought
with economic powers.

Even ancient wisdom suggests that economic progress
is the key to power and economics is the mother of all human knowledge.

In economics there is a concept called Nash
equilibrium. If we all fellow citizens were to follow our culture and wisdom
from our texts then this will make us work optimally as we will do best for
ourselves but also best for the group (country) hence reaching equilibrium
which is the right place we deserve.

Dharma as per Bhagvad Gita has 5 parts:

Gyan – Pursuits of knowledge of self
and skills required to earn a living

Samarpan – Dedication to one’s cause,
that is, doing what one is required to efficiently and to the best of one’s
abilities

Nyay – Have justice behind every action
and decision one makes.

Prem – Compassions towards everything
in this universe.

Dhairya – This comes from strengthening
our sense of right and wrong such that one can withstand any randomness,
entropy, risk etc. either from inside or from outside.

Nassim Nicholas Taleb speaks at length about these
attributes in his recent book “Antifragile”.

The books of economics speak about rules that one
needs to follow to become economically smart but our ancient wisdom speaks
about principles. So if we were to live by these principles, then the nuts and
bolts would automatically fit. We shall show the world new rules of economics
just by our actions that emanate from such principles. Yet again.

So we end this piece asking a few questions to
ponder over:

Isn’t
it true that if something has lasted for centuries will continue to do so
when compared to new books of thoughts?

Isn’t
it true that our philosophy is simple and can be followed by anyone

Why
don’t we dare to think like Indians and not be afraid to be different from
the world?

Why
can’t we challenge the status quo and also show light to the world.

It is high time we regain our identity and work
towards our nation’s prosperity. Some may call it Ram Rajya, or some may call
it Incredible India. The point is, we have to just THINK like Indians.

As Thomas H.
Davenport and Jeanne G. Harris put it in their book “Competing on Analytics”, Analytics is the new science of winning.
Harping on the virtues of Analytics would be a wasteful exercise. People are
sold on the idea.

Heavy duty
analytics was deployed to locate the MH370. Big data analytics was at play to
effectively devise disaster management plan when hurricane Sandy hit America.
Application of Analytics to retain and reward customers, design products and
market them is widely in use. Banks and financial services firms use fraud
analytics, social media analysis and text analytics effectively to reduce costs
and improve efficiency.

The advent of
Facebook, Twitter and LinkedIn has revolutionized the the behavior of people in many spheres of
lives Barrack Obama won the Presidential elections for the second term in 2012 and
social media campaigning was an integral part of his overall campaign strategy.
He is even called the “first social media president”! Indian political parties
have been deploying social media effectively to campaign for the ongoing
elections.

The impact of
social media has been more significant in the field of marketing. Before buying
a mobile phone, most people do research and read reviews on the internet.
Similar behavior extends to other kinds of purchases including a house, car,
electronics goods, books and even financial products like stocks and insurance.

Due to changes
in behavior of a customer, companies have changed their marketing strategies
with increase focus on social media. There is a focus to increase presence on
the web, engage directly with end customers through social media and manage any
adverse feedback quickly and effectively.
Social media can be used as a powerful tool to marketing, customer
servicing and maintaining public relations

The significance
of social media prompted us to carry out a study on the visibility of ‘Life
Insurance’ on social media.

Life Insurance
forms 16% of the total financial savings of Indian households. Only 3% of the
savings are invested in the capital markets.

Compositing of Savings in Financial Assets of Indian
Households

Source: Reserve Bank of
India, 2012-13

The Life Insurance industry has seen a gradual decline in various
key parameters over the last three years.

While there are
numerous reasons which have contributed the decline, how does life insurance
perform in terms of their presence on social media?

For the purpose
of this study, social media monitoring tool Opinion Tracker was used. We
tracked Web News, Social Networks (excluding Twitter) and Blogs. We compare the
presence of life insurance on social media, with the stock market, for a
3-month period (29/12/2013 to 29/03/2014). Is the flow of savings into Life
Insurance and stock markets proportional to their presence on the social media?

The key words
used for the study were Insurance, Life Insurance, IRDA, Indemnity, Life
coverage, Tax savings 80c Life Insurance, and names of various Life Insurance
companies in India, to get the count for the ‘Life Insurance’ presence. Words
like Nifty, Sensex, Equity, Stock, BSE, NSE and SEBI were used for finding the
presence of ‘Stock Market’ on social media.

While the
results can be influenced by the period of study, the use of different key
words from what we have used, and other industry related reasons, the results
that we got were quite astonishing, even accounting for all the different
scenarios which could result in different numbers from what we have.

Life
Insurance

Stock
Market

Total Posts

6562

211966

Web News

6514

210456

Blogs

46

1373

Social Network

2

137

Maximum Posts
in a day

139 (on
14/03/14)

3648 (on
20/02/14)

Minimum Posts
in a day

16 (on
23/03/14)

599 (on
26/01/14)

The results shows despite so much of social media buzz for Stock
Market, people prefer to invest their savings in Life Insurance. It clearly
shows the tendency of Indian people to save and their risk-averse attitude.
But, we would like to implore the readers to think for a moment, the kind of
funds that can flow into Life Insurance market, if they upped their presence on
social media!

Life insurance
companies do not make much use of social media. The Life Insurance companies
still rely on their agency force to spread awareness about the products. This
claim is also supported by a recent survey published by Max Life
Insurance-Nielsen, where 58% respondents said that Insurance awareness is
generated by agents, while only 8% respondents believed that the awareness is
generated by internet. They need to realize that Social Media has rapidly
turned into a vital part of the modern marketing mix as well as the lives of at
least the urban customers (existing or potential). A few benefits of using
social media would be:

ØIncomparable reach. Would help the companies explore untouched
markets and reach potential customers directly without middlemen

ØInteract with numerous people, making them their potential customer
and eventually resulting in sales.

ØOpportunity to showcase brand and products.

ØDevelop a loyal community of prospects.

ØEnhance company trustworthiness.

ØCut marketing costs.

ØDirectly interact with customers to know their grievances and
preferences

A dedicated team
to spread awareness about the need for life insurance, the right cover, the
products, and to engage consistently with customers would help the Life
Insurance Companies to achieve growth in their business.

This research summary was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 1, pp-8-9; Co-author: Vishnu Vardhan Pallreddy

https://iib.gov.in/IRDA/Articles/IIB%20Bulletin%20Q1%202014-15.pdf

Professor Sharon Tennyson of the Department
of Policy Analysis and Management at the Cornell University, is an active
researcher in the area of Insurance Laws and Economics, is a widely acclaimed
authority on matters pertaining to Insurance, on the editorial board of several
Insurance related journals and has received various best paper awards for her
work in the field of Insurance.

In her research paper titled “Moral, Social, and Economic Dimensions of
Insurance Claims Fraud”, published in 2008, by the Social Research
Quarterly, she writes that “Customer dishonesty stems from a complex interplay
of motivations and circumstances, moderated by morality, opportunity, social
norms, and institutional context”.

Her research deserves mention, as the Indian
insurance industry is reeling due to the pressures of various types of
fraudulent claims.

Tennyson succinctly reminds us that the
Insurance frauds are different from other types of frauds [shoplifting or tax
avoidance] as actions of a few [fraudulent claims] result in increased premiums
for everyone going forward. Also, attempts to prevent fraud by the insurance
companies, lead to less protection from risks than would occur in a market
without fraud. It also adds to the costs of the insurers. However, policing
could lead to more fraud because it erodes the trust factor and results in more
costs. Most analysts believe that the costs and prevalence of opportunistic
soft fraud – particularly buildup – is much higher than those of more
systematic, planned or criminal claims fraud

Therefore, prevention of fraud may be a
less costly alternative. However, it requires a better understanding of the
different dimensions of fraud, the determinants of consumer behaviour, and the
relationship between consumer behaviour and institutional rules.

Tennyson writes that much of the Insurance
claims go undetected and it is difficult to estimate the number of fraudulent
activities or the amount of excessive claims.

Moral hazard is an important psychological
aspect of Insurance. Having Insurance reduces the insured’s incentives to
prevent losses, and exaggerated or fictitious claims. Also, customers who feel that
insurance companies treat customers unfairly / make too much money / charge
unfair premiums, are more accepting of fraud. Evidence also suggests that
consumers will be more willing to commit fraud if they perceive that the harm
to others would be small.

Probability of detection, risk aversion,
sensitivity to reputation penalties, social stigma, psychic costs of engaging
in fraud, social norms in the form of peer group or network influences etc. are
some of the deterrents to committing fraud.

Efforts to reduce prevalence and
acceptability of fraud improve image of insurance industry and enhance trust
between insurers and customers. General insurance education improves the
knowledge of insurance as well as results in more positive attitudes toward
insurance institutions. Also, fraud public awareness campaigns may also be
effective.

Evidence
suggests that:

a.Extent of fraudulent claiming
is very positively related to the percentage of consumers who find claims fraud
to be acceptable

b.Attitudes vary from urban to
rural, women to men, elderly to young. Women, highly educated and the elderly
are likely to be less accepting of fraud

c.Consumers with more insurance
experience (more policies and more claims) are less accepting of insurance
fraud

d.Moral-psychological factors in
the form of ethical thinking etc impact the fraud acceptance among the survey
respondents

b.Much of the focus has been
directed toward detecting and criminalizing fraud

c.Fraud awareness campaigns often
emphasize the criminal nature of fraud and the likelihood of being caught and
penalized

d.Success in fighting fraud is
often measured by number of cases brought or convictions obtained

e.Increasing willingness on the
part of insurers to litigate fraud and refer cases to law enforcement agencies

Opportunistic
soft fraud

a.Widely believed to be much more
prevalent than criminal fraud

b.Improving fraud detection and
advertising this fact may provide an effective deterrent

c.Many consumers do not view some
forms of claims exaggeration as fraudulent

d.A criminal focus applied to
these cases may reinforce negative perceptions of insurance institutions and
their fairness to customers

When internal monitors are primed, most
customers state that insurance fraud (even minor claims exaggeration) is unacceptable.
Consumers with more insurance experience and those with recent claims
experience are less likely to believe that claims exaggeration is acceptable.
Greater focus on social and psychological dimensions of insurance claims fraud
may increase the success of soft fraud prevention without impairing insurance
relationships.

This rise in urbanisation and economic affluence
supported with significant infrastructure developments, government initiatives
and demand-supply gap has triggered development across real estate spectrum
says Pooja Bajaj and Nupur Pavan Bang.

India, the world’s fourth largest economy with 1.2
billion people, has steadily emerged as one of the most preferred destinations
for global business.

Consequently, this has fuelled demand for real estate across verticals viz
residential, commercial and hospitality.

On account of globalisation, favourable socio-economic profile, natural
features, demographics and government initiatives, the Indian realty sector is
being viewed as one of the most favourable destinations for investors and
developers globally.

Increase in the natural and migrant populace in cities
in search of jobs and business opportunity who are keen to invest in real
estate, coupled with rising per capita income, have given a major demand boost
in the sector.

According to the United Nations estimates, India leads in the rate of change of
urban population amongst all the BRIC nations (Brazil, Russia, India and
China).

It is estimated that 843 million people will reside in
cities by 2050 in India, which is equal to combined population of the US,
Brazil, Russia, Japan and Germany.

Favourable
government reforms and policies such as repealing of Urban Land Ceiling Act,
altering FSI rules, allowing 100 per cent FDI in the construction development
through automatic route, approving the recent Real Estate (Regulation and
Development) Bill, 2013, have further strengthened confidence of investors in
the sector.

This rise
in urbanisation and economic affluence supported with significant
infrastructure developments, government initiatives and demand-supply gap has
triggered development across real estate spectrum.

Apart from residential, commercial and hospitality, development of educational
and healthcare institutions has further widened the scope of opportunities for
the sector. This development is now not restricted only to metropolitan cities
but is quickly gaining momentum even in Tier II and III cities as well.

As per an
IBEF report on the sector, “the second largest employment generation sector
after agriculture, real estate contributes about 6.3 per cent to India's gross
domestic product (GDP). The real estate sector of India is projected to post
annual revenues of $180 billion by 2020 against $66.8 billion in 2010-11, a
compound annual growth rate (CAGR) of 11.6 per cent. The foreign direct investment (FDI) in the
sector is expected to touch $25 billion in the next 10 years from its current
$4 billion”.

The construction development sector, including townships, housing and built-up
infrastructure garnered total FDI worth $22,671.95 million in the period April
2000-August 2013. Construction (infrastructure) activities during the period
received FDI worth $2,280.95 million, according to the Department of Industrial
Policy and Promotion (DIPP).

The real
estate prices over the past decade has increased manifold across cities. During
the period Q2-2009 to Q3 -2013, India has witnessed an increase in residential
apartment prices by over 50% on an average.

As per Knight Frank Research, since 2009, IT/ITeS driven markets of Bengaluru,
Pune and Chennai have witnessed a minimum of 38 per cent increase in weighted
average price.

However,
currently it’s mainly the affluent investors who are able to reap the benefits
of high return in the sector.

Despite the desire to invest in realty, the mid-income-segment populace of the
country is not getting the right opportunities primarily on account of large
ticket size, transaction costs coupled with high home loan interest rates.

For
example, the overall ticket size of an apartment may vary from about Rs 3.6-3.8
mn (considering an average 2 Bedroom, Hall and Kitchen apartment of 1200
sq.ft.) in business districts such as Madhapur, Kondapur and Gachibowli
situated at a distance of about 8-12 kms from prime residential areas in
Hyderabad.

From investment perspective, an amount of about Rs 4 mn for direct purchase of
property is not only a large ticket size for a small investor, but this option
involves several risks related to title of the property and furthermore
benefits of diversification are also not available.

While housing loans are available, the high interest rate regime in India,
makes taking loans against property a less attractive option.

Investment
Vehicles

Real
Estate Fund is a vehicle that can bridge the gap between properties and investors.

However, most of these funds came into existence before the Alternate
Investment Fund (AIF) guidelines were implemented by Securities and Exchange Board
of India (SEBI).

AIF,
notified by SEBI in May 2012 in India, allows pooling of funds from Indian and
foreign investors for investments in areas like real estate, private equity and
hedge funds.

As per the guidelines, AIFs shall be close-ended funds and have tenure of
atleast three years with a maximum number of 1000 investors. Further, the
minimum investment to be accepted by AIFs from a single investor is Rs 1 crore
(Rs 10 million), thereby differentiating retail investors and long-term
high-net-worth individual (HNI) investors.

Another
popular vehicle for investment is Real Estate Investment Trust (REIT). To
enable real estate investors reach capital markets, in 2008, SEBI had issued
certain draft regulations for introducing REITs and later in October 2013, SEBI
announced the draft consultation paper on REIT Regulations.

As per
the regulations, REITs in India would issue securities, which would be listed
on stock exchanges and will invest 90 per cent of the net asset value in
completed rent generating properties in India and remaining in developmental
properties, listed/unlisted debt of companies, mortgage backed securities
etc.

They may raise funds from any investors, resident or foreign. It is proposed
that initially the units of the REITs may be offered only to HNIs/institutions
and therefore, the minimum subscription size shall be Rs 2 lakh.

REIT
shall provide investors a real estate investment vehicle which has
characteristics similar to mutual fund and Exchange Traded Fund structures for
stocks, bonds and other securities.

REITs offer several benefits as they will be listed, will provide regular and
stable source of income for investors with least project execution risk.
However, the proposed initial investment requirement of INR 2 lakhs may be high
for some retail investors, though they are much lower than the minimum required
investments in AIFs.

In 2008, SEBI issued guidelines for Real Estate Mutual Fund (REMF) in India.
Similar to a Mutual Fund, a REMF is a scheme of a trust fund set up to manage
pooled money of unit holders by investing in real estate projects,
mortgage-backed securities as well as equity/debt/debentures of real estate
companies.

These funds are close-ended and listed on stock exchanges. In addition to
earning returns from properties by way of rents and capital appreciation, these
funds also get interests, dividends and share price appreciation from
securities of real estate companies.

Issues
related to valuation, lack of clarity and uncertainties have deterred players
from launching REMFs till now in India. However, with strong fundamentals and
improving transparency in property market, REMFs are expected to make it easier
for an average investor to invest in real estate.

With such funds, even by investing an amount of say INR 10,000 - 20,000,
investors may be able to own a small portion in a high value property.

It will
also provide significant benefits of diversification as investors may be able
to invest in different types of properties across different cities without
getting into cumbersome paperwork.

There are
certain critical differences between a REIT and REMF. REITs have to invest 90
per cent of the net asset value in finished real estate projects and not more
than 10 per cent in developmental properties.

However, REMFs have to invest at least 35 per cent in finished projects and at
least 75 per cent of the corpus in real estate or related securities, and
therefore they can invest in under-development properties to a large
extent.

Indian
real estate is one of the most sought after investment destinations for both
HNI investors and retail/small investors.

However, currently most of the investment vehicles – direct purchase or AIF
available are primarily targeting or can attract only HNIs on account of huge
ticket size for investment.

REITs have also been proposed to target HNIs initially. For an average
investor, investments can be routed through REMF or Real Estate ETF. Both these
options are currently either not available or not successful.

The government should consider the need of these investors who wants to
participate in the sector. This will provide further impetus to the sector by
supplying additional source of capital via retail investors' money.

This might also reduce black money in the sector significantly by making
operations of various stakeholders involved more transparent and accountable.